The building was commissioned by the British-controlled regency[1] for Maharaja Ganga Singh (1881–1942) while he was still in his minority as they considered the existing Junagarh Fort unsuitable for a modern monarch.

Stanley Reed, the official reporter of the 1905-06 India tour of the Prince and Princess of Wales (later King George V and Queen Mary of Great Britain) noted that "The Laxmi Niwas Palace is the most perfect modern building in the Indo-Saracenic style in India - an entirely graceful pile of carved red sandstone, nobly proportioned and harmonising entirely with its environment.

After a ritual blessing ceremony construction commenced in 1896 on empty land 5 miles[2] from the existing Junagarh Fort on what is now Dr. Karni Singhji Road.

[4] The palace was originally designed to cost 100,000 rupees[5] due to the planned use of cheaper materials including the suggestion of using stucco instead of carved stone in the construction.

Soon however all cost-cutting was abandoned and by time of the completion of the first wing the cost had increased to 1 million rupees[5] due to the use of the finest materials including the widespread employment of finely carved stonework.